Because of the constant yearly rise of health services and health insurance premiums, healthcare has become a large portion of everyone’s personal budget. However, as these costs have increased over the last few decades, medical savings accounts have come into play to help offset them. There are a few different accounts you can choose from to help you save money towards your healthcare, but we’re only going to be looking at 2 of them: Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs). Both HSAs and FSAs are savings accounts that allow you to save specifically for medical expenses. Aside from that fact, the two accounts differ in a number of significant ways. In this article we’re going to compare and contrast them so you get an idea of what they are, how they work, and if one of them would be beneficial to you.
Health Savings Accounts (HSAs)
Health Savings Accounts are not typical savings accounts, and they are only available to people with a high-deductible health plan (HDHP). As of 2023 an HDHP is defined as any plan with a minimum deductible of $1,500 for individual coverage or $3,000 for family coverage with an out-of-pocket maximum of $7,500 and $15,000 respectively. An HSA is a triple tax advantaged account that can be used to pay for qualifying medical expenses. It’s known as “triple tax-advantaged” because your contributions to your account are not taxed, the money in the account is never taxed while it’s in the account, even if it earns interest or investment returns.
Additionally, as long as you use your HSA funds for qualified medical expenses, your withdrawals will also never be taxed. However, if you use your HSA funds for anything besides qualified medical expenses you will have a 20% tax penalty. Another great thing about HSAs is that you can actually invest your funds as well, similar to the way you would a 401K. This lets your HSA actually make you money, if you invest properly you could end up with a nice health savings account keeping you from having to pay for little to any of your healthcare.
How HSAs Work
If you open an HSA with your HDHP, you will deposit money into the HSA that you can use to pay for qualified medical expenses that your health plan does not cover. Which are any services that the IRS recognizes as a eligible medical costs these expenses include:
Acupuncture
Ambulance services
Birth control/contraceptive devices
Blood pressure monitors
Blood sugar test kits/test strips
Chiropractic therapy/exams/adjustments
Contact lenses
Copayments
Dental care
Dermatological services
Diagnostic services
Eye exams
Eye surgery
Flu shots
Gynecological care
Incontinence supplies
Infertility treatments
Insulin and diabetic supplies
Laboratory fees
Lactation expenses
Legal sterilization
Laser eye surgery/ LASIK
Menstrual care products
Nasal strips
Obstetric care
Over the counter (OTC) treatments containing medicine (i.e., cold treatments, pain relievers, sinus medications, etc.)
Physical exams
Pregnancy test kits
Smoking cessation programs
Therapy or counseling
Treatment for alcohol or drug dependency
Vaccinations
Vision care
Wrist supports/elastic straps
X-ray fees
You can use the HSA funds to pay all your medical bills until you reach your plan’s deductible, and then you can use them to cover your coinsurance or copayments until you reach your annual out-of-pocket maximum. Additionally, unlike other health spending accounts, HSA funds will never expire. Your funds roll over into the new year, every year so you don’t have to rush to spend the money in the account. One thing you should note though, is that HSAs do have a contribution limit, these limits change annually but as of 2023 if you have an individual plan you can only contribute up to $3,850 for the year. For family plans the limit is $7,750.
Flexible Spending Accounts (FSAs)
A Flexible Spending Account, sometimes called a Flexible Spending Arrangement, is a type of savings account that offers you specific tax advantages. You don’t actually set these accounts up, instead they are set up by your employer. FSAs let you contribute a portion of your pay into the account. Your employer can also choose to contribute to the FSA on your behalf, sort of like when your employer matches your 401K except the employer decides exactly how much they contribute. The FSA funds are then used to reimburse you for eligible medical and dental expenses.
How FSAs Work
An FSA is a voluntary plan that allows employees to contribute up to $3,050 a year (as of 2023) to pay for eligible medical expenses that are not covered by their health insurance plan such as:
Health insurance copayments
Doctor’s visits
Coinsurance payments
Dental work
Vision expenses
Prescriptions
Therapy and counseling services
Chiropractic care
Acupuncture
Hospital fees
Surgery costs
Diagnostic services
Allergy testing
If your employer offers group health insurance they can also offer these FSA plans as an additional employment benefit. Your employer can choose to also contribute to your FSA, they can choose to match your contributions or decide to pay a smaller amount. They are not required to contribute though, so some employers might not add into your FSA at all. If your employer does choose to contribute, their contribution typically won’t count towards your yearly limit no matter how much they contribute.
The Differences
You can’t have both of these plans at the same time, so if your employer offers an FSA but you’re also considering an HSA, you’ll want to keep these key differences in mind when you’re making your decision.
Qualifications
Compared to FSAs, HSAs have stricter eligibility requirements. To qualify for an HSA, you must have an HDHP. The HDHP has to be your only health insurance. Additionally if you are eligible for Medicare or are a claimed dependent on someone else’s taxes you can not open an HSA. On the other hand FSAs have to be set up by your employer, which automatically excludes self-employed or unemployed people. Your employer does have some qualifications they have to meet to be able to offer FSAs. For example they can only contribute to employee FSAs if they own less than 2% of the company. However, if they already offer these plans then there’s no other eligibility requirement on your end, all employees are eligible even ones without health insurance plans.
Annual contribution limits
Since contributions to these accounts are tax free they lower your taxable income. Because of this the IRS has placed limits on these plans. For FSAs the contribution limit is $3,050 as of 2023. For HSAs it’s $3,850 for individual plans and $7,750 for family plans.
Rollover rules
One of the biggest advantages of an HSA is that your funds roll over, meaning there are no time restrictions on using your funds. Since the account belongs to you, you get to decide when and how to use the funds. However for FSAs it’s not as simple. Unused funds are not automatically carried over into the new year. Since your employer owns the plan they decide what happens to the funds. Employers have 3 choices when it comes to rolling funds over:
Forfeiture – This means any unused funds will not roll over. Instead, they will be transferred to the employer.
Grace period – This is a 2 ½ month period after the plan year ends to use the last of the fund in the account, after this time frame, the funds then go to your employer.
Carryover- This allows employees to take $500 of the unused money over to the new year’s plan. Any funds left in the account after the $500 is carried over goes to the employer.
Changing contribution amounts
This is another point where HSAs are simple. You can contribute any amount you want at any time, you don’t have to keep the same contribution every time. Whereas with FSAs your contribution amount stays the same through the year. You can only change your contribution amount 3 times. First at open enrollment, when the plan renews you can decide to change your contribution amount for the new year. Next is if there is a change to your family situation such as a marriage, death, or birth you will be allowed to adjust the amount. Lastly, if you change employers when you enroll in your new employer’s health plan, assuming they offer one, you can select your new contribution amount since it’s an entirely new FSA.
Keeping your account when changing jobs
Unlike FSAs, HSAs follow you no matter how many times you change jobs because your account belongs to you. With FSA’s, they belong to your employer so unless you qualify for COBRA, you will no longer have access to your FSA if you leave your job.
Which Is Better?
If you qualify, the higher contribution limits and contribution rollover of HSAs make it the better option overall. HSAs are more flexible than FSAs, allowing you to save money over time for potential medical expenses. However, unless your job allows you to roll over $500 annually, your FSA balance will not build up over time. Depending on your employer’s decisions, unused funds are generally forfeited to your employer at the end of this year, meaning if you didn’t have many medical expenses for that year you could be losing money.
However, most of the time choosing between them is more dependent on your situation rather than which one you actually prefer to have. This is because the decision will depend if your employer even offers an FSA and whether or not your health insurance plan is an HDHP.
Getting Help With EZ
Both of these options can be excellent tax-free ways to save, invest, and pay for medical expenses, and EZ can help if you’re interested in HSAs. If you choose an HDHP, open an HSA as soon as you are eligible and begin contributing. Since these accounts continue to be one of the most effective ways to reduce expenses and improve your overall financial standing. To begin saving immediately, enter your zip code in the box below to receive free instant quotes. Or, contact one of our licensed agents at 877-670-3557.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act was created to provide economic assistance to families, workers, and businesses during these uncertain times. One important thing the CARES Act has done is to allow more flexibility for Health Savings Accounts (HSAs), Flexible Spending Accounts (FSAs), or Health Reimbursement Arrangements (HRAs). Now, some over-the-counter medications and other common healthcare items will be eligible for reimbursement. Prior to the passage of this act, these medications were only eligible for reimbursement with a prescription.
The CARES Act has made over-the-counter medications eligible for reimbursement through HSAs, FSAs and HRAs.
The Changes
If you are an employer who offers HSAs, FSAs, or HRAs, it is important that you make your employees aware of the new rules put in place by the CARES Act. They can now use their HSA or FSA to get reimbursed for over-the-counter medicine, as well as for healthcare items like feminine hygiene products. Before this act was passed, employees needed a prescription from their doctor just to get something as simple as Tylenol reimbursed through their HSA, FSA, or HRA. The change began retroactively as of January 1, 2020, which means reimbursements can be filed for over-the-counter medicine or other newly eligible products purchased anytime since January 1, 2020.
What Is Considered Eligible?
The CARES Act has made thousands of items eligible for reimbursement, including the following medications and healthcare products:
Feminine hygiene products will also be covered for reimbursement.
Acne medications
Sleep aids
Digestive aids, including laxatives
Tampons, pads, and liners
Cold, cough, and flu medicine
Allergy and sinus medicine
Anti-inflammatory medicine
Pain relievers
Baby rash ointments
Medications for eczema and psoriasis
Acid controllers
You and your employees might have had a rough year, but the government has been working on ways to lessen some of the burdens. These over-the-counter medications and other healthcare products being offered for reimbursement without a prescription will allow your employees to seek treatment for simple things without having to go to the doctor and pay a copay.
If you do not already offer a HRA or group insurance to your employees, but are considering choosing to help them with healthcare costs, EZ can help. We can review all the available plans in your area and help guide you towards the most affordable ones with the best coverage options. You care about your employees and we care about helping you find a plan that meets all your needs. We will provide you with one agent to work with you and compare all available plans in your area for free. To get instant quotes, simply enter your zip code in the bar above, or if you wish to speak directly with one of our agents, call 888-998-2027. There is no hassle or obligation.
If you are thinking of offering group insurance or a HRA to your employees, or if you are already offering them one or both, you might be wondering how to withhold employee insurance premiums and your contributions from their paycheck. Do the deductions come out of their paycheck pre-tax or after-tax? In some cases, you can deduct their premium and your contributions from their paychecks pre-tax; other premiums may need to be deducted after-tax. It is important to know what kinds of contributions can be deducted pre-tax, as well as the advantage and disadvantages of doing so.
Pre-Tax Deductions
Group health insurance deductions can be taken pre-tax.
Taking a pre-tax deduction means that you, the employer, withdraw money directly from your employees’ paychecks to cover the cost of benefits before income or payroll taxes are withheld. Internal Revenue Code (IRC) Section 125 allows for payroll deductions to be taken pre-tax for certain benefits, including:
In order to know which pre-tax benefits are exempt from state and local taxes, you will have to check your state and local laws.
What is the advantage of deducting premiums and contributions from your employees’ paychecks pre-tax? For employees, when premiums and contributions are deducted pre-tax, the amount of income that they have to pay taxes on is reduced, in some cases by up to 40%.
Doing this not only benefits your employees, it also benefits you; pre-tax deductions lower your tax liability, including the Federal Unemployment Tax (FUCA), State Unemployment Insurance (SUI) and FICA. For every dollar contributed to a retirement account, FSA or insurance plan, an employee’s taxable income is decreased accordingly. Your employees’ paychecks will effectively be lowered, meaning you will pay less in payrolltaxes.
The drawback is that your employee might owe taxes on the money you withheld in the future. This is because they did not pay any federal, state, and local taxes on the contributions at the time they were withheld. These taxes were simply deferred. For example, when your employee retires and begins drawing on their 401(k), they will owe taxes on the money they use from their pre-taxed 401(k) plan.
After-Tax Deductions
Contributions to retirement plans and other benefits are deducted after income and payroll taxes are deducted.
After-tax premiums and contributions are deducted from your employees’ paychecks after income and payroll taxes are deducted. Unlike pre-tax deductions, these will not affect your employee’s taxable income. However, you and your employee will owe more payroll taxes with after-tax deductions. If premiums are deducted after-tax, your employees will not pay taxes when using the benefits in the future, such as when they withdraw money from a post-tax retirement or health arrangement plan. Common after-tax premiums include:
Some retirement plans (such as a Roth 401(k) plan)
Disability insurance
Life insurance
Major medical coverage purchased by an employee on their own
Need Help?
If you need help finding group insurance, a HSA, FSA, or HRA, then EZ.Insure can help. We want to make sure that you save as much money as possible, which is why we compare all plans in your area, for free. We will assess your business’ and employees’ needs and find the best plan that will help cut costs, not coverage. If you need help figuring out which plans qualify for pre-tax and post-tax deductions, we can help with that too. We will answer your questions and guide you through the process. To start comparing plans for free, simply enter your zip code on the bar above, or to speak directly with an agent, call 888-998-2027.
One of the best ways to attract and retain the best employees is to offer competitive benefits. These benefits can come in many forms and are an important part of any employee’s compensation package. One of the most important benefits to most employees is health insurance; in fact, 56% of employees would prefer a healthcare plan to a raise! When you offer employees benefits such as health insurance, they are not only healthier, but happier. And what comes of happy employees? Higher productivity that helps boost your bottom line! So take a look at your budget, and see if you can consider offering one (or more) of these common employee benefits.
How to Structure Your Benefits Plan
You have 2 choices when it comes to offering health benefits to your employees.
Generally businesses utilize two different structures when it comes to offering employee benefits:
Organizational-oriented benefits: Employers offer employees specific or defined benefits, such as traditional health insurance, a pension or other retirement plan, or wellness program. These benefits are employer-owned and employer-selected.
Consumer-oriented benefits: Employers offer employees employer-funded dollars to purchase their own benefits. When it comes to healthcare, this can be something like a QSEHRA or ICHRA, both of which would allow you to reimburse your employees for wellness and medical expenses.
Health Insurance
Health insurance is a must for many people when they’re looking for a job, and also the reason that many employees choose to stay in a job. In fact, research shows that 78% of employees are more likely to stay with an employer if they are offered health insurance. Many employees are interested in traditional healthcare plans, because they provide the most comprehensive benefits for them and their families.
If you choose not to offer a traditional health insurance policy, you do have other options, but not offering any kind of healthcare plan can end up costing you. Losing even one employee can cost you 50-400% of their annual salary. If you are unsure whether you can afford a group health plan, remember that there are a variety of group health insurance plans to choose from, and many are more affordable than you might think. This is especially true when you consider how important this benefit is to employee retention! To find out what plan is right for you, speak with an EZ agent.
In addition to offering a healthcare plan to your employees, you can also choose to offer a FSA or HSA. Both of these types of accounts allow employees to put tax-free money aside for qualified medical expenses, but they have a few differences. FSAs work with nearly any health insurance plan, but if your employee does not use the money by the end of the year, then they will lose it. With a HSA, the money employees put aside will continue to roll over for as long as they have the account. Unlike FSAs, though, HSAs must be paired with a High Deductible Health Plan.
Dental & Vision
You can also choose to offer your employees dental and vision care. Dental and vision coverage is cheaper than health insurance and so is much more affordable to offer. Employees with families or those who have issues with their vision will find these benefits especially important.
A retirement savings plan, or 401(k) plan, is a great way to help your employees save towards their retirement. You can offer a certain amount to match their contributions. For example, many companies offer up to a 4% match to what their employees contribute to the plan.
Paid Time Off
This is a great benefit to offer your employees. Being able to go on vacation and get paid for it is great for your employees’ morale. In addition, being able to call in sick and not have to worry about losing a day of pay is essential for many, especially employees with families.
Short term disability offers employees their pay until they can return to work.
Short-Term Disability
Offering short-term disability means that employees will continue to get paid if they cannot work after experiencing an injury or illness. Employers continue to pay a percentage of employee’s income until they are able to come back to work.
These programs have grown in popularity over the years. Wellness programs help employees get healthier by providing benefits such as gym membership stipends. These programs don’t need to focus solely on physical health: according to one study, 73% of employers have mental wellness programs for their employees.
When it comes to choosing which benefits to offer your employees, you can’t go wrong with health insurance. If you are looking for a group health plan, there are some things to consider, such as making sure you are following state regulations, and that you are getting the most benefits for the best price. EZ.Insure agents can check all these boxes and more, because we work with the top-rated health insurance companies in the nation. We will compare plans in your area and find a plan that fits your budget, and makes your employees happy. To get free instant quotes, simply enter your zip code in the bar above, or to speak to an agent, call 888-998-2027.
Offering any type of healthcare plan to your employees is beneficial to both of you, and not just because they help keep your employees healthy and productive. There are a lot of tax benefits to offering healthcare, especially if you include savings accounts like flexible spending accounts (FSAs).
FSAs, which you can offer alongside any type of healthcare plan (employees don’t even need to participate in the plan to opt into the FSA), allow employees to put money aside on a pre-tax basis and then use it for qualified medical expenses. This reduces your employees’ taxable incomes, as well as your payroll taxes. The downside for employees? The money in these accounts doesn’t roll over each year, so if they don’t use (most of) it, they lose it. The good news? That money reverts back to you, and you have a few options of what to do with it.
Employees can then use the pre-tax money throughout the year on a wide variety of expenses,
How FSAs Work
If employees choose to opt into your offered FSA, then they will contribute a certain amount of their paycheck to the account. They can then use that pre-tax money throughout the year on a wide variety of expenses, such as deductibles, copays, coinsurance, glasses, dental care, prescription and OTC medications, and even many common drugstore items. Employees’ annual contributions are taken out of their paychecks in installments, and they are treated as salary reductions for tax purposes (hence the tax benefits!). The reimbursements for the qualified expenses are also tax-free.
Both you and your employee can contribute to their FSA, but your employee’s contribution cannot exceed a certain amount. For 2020, that amount is $2,750. Whatever you choose to contribute is in addition to that amount and does not count towards their limit.
The “Use It or Lose it Rule”
FSAs take a bit of planning on an employee’s part. They need to choose their contribution amount during an annual enrollment period, and that amount cannot be changed during the year unless certain qualifying “change of status” events occur, such as change in marital status. 2020, however, has been a bit different: the IRS announced in May of this year that they will allow mid-year changes to FSA contributions, but this is most likely a temporary measure.
With an FSA money not used by employees doesn’t go to waste! A portion can roll over!
If employees don’t end up using all of the money in their FSA accounts by the end of the year, then the balance generally reverts back to you, the employer. There are two exceptions to this “use it or lose it” rule:
Your FSA can allow a 2 ½ month grace period, meaning that (if your FSA operates on a calendar year basis, which most do) your employees will have until March 15th to use the funds
Your FSA can allow employees to roll over $500 of their unused balance into the next year
You can only offer one of these options to employees, and you are not actually required to offer either of them, but it is common practice to do so. If you do offer one of these options to your employees, and they still have more than $500 left in their account at the end of their year, or if they haven’t used up all of the money by March 15th, then that money reverts back to you. So what do you do with it?
What You Can Do with Forfeited Money
The IRS gives you a few options of what to with any unused FSA dollars. You can use it to:
Help with plan administration costs. You can choose to outsource the administration of your FSA for a cost of around $5/month/employee, and you can use the leftover funds to pay for it.
Reduce employee FSA salary reductions for the next year. For example, if an employee wants to contribute $500 to their next year’s FSA, you could allow them to contribute only $480 and use leftover funds to make up the other $20.
Add money to employees’ accounts. You can choose to use the money to offset any extra expenses incurred by employees in the next year. For example, if an employee contributes $1,000 to their next year’s FSA, but submits claims for $1,200, you can use leftover FSA money to cover that extra $200. This is generally not the most popular option, because it is only useful to employees if they spend more than they’ve put aside. They might also begin to expect this extra coverage every year.
Pay your employees in cash. If you choose to do this, you need to make sure that you are distributing the money in a “uniform” fashion, meaning you can’t just give the money back to the one or two employees who didn’t use their FSA money. You would also need to track down any former employees from that year and pay them their share. Remember, too, that the money you give them will be considered income, so it must be reported and will have taxes deducted from it.
Tax-advantaged healthcare benefits are basically a win for everyone involved, even with the small caveat of the FSA “use it or lose it” rule. You and your employees save on taxes, and any balance remaining in their account is never truly “lost” – you can take it and use it to continue helping them (or your business) with healthcare costs. We get it, this is all complicated stuff, so if you have questions about offering FSAs or any other type of group health benefit, we can help. Drop us a line and we’ll set you up with one (and only one) knowledgeable agent who will answer all of your questions, go over all of your options with you, and give you fast, accurate quotes when you’re ready for them. Ready to get started? Simply enter your zip code in the bar above, or to speak to an agent, call 888-998-2027.
There are many ways you can describe the health insurance system, but when it comes to enrollment, “flexible” isn’t always one of them. Each year, you choose your company’s plan and your employees have a set enrollment period (either the ACA open enrollment period or another one of your choosing) during which they can sign up. Once they do, that’s pretty much it for the year, unless they experience a qualifying life event, like marriage or the birth of a child. But 2020 hasn’t been an ordinary year. The IRS has decided to recognize this fact and allow mid-year changes to healthcare plans, and they are leaving the decision about whether to allow these changes up to you, the employer.
What the IRS Is Allowing
The IRS has decided to allow mid-year changes to healthcare plans including cafeteria plans.
If you offer your employees a healthcare plan under IRS Section 125 – otherwise known as a Cafeteria Plan – and/or a flexible spending account (FSA), then you have a decision to make this year. The normally rigid rules surrounding when and how employees can make changes to these plans have been suspended by the IRS, and you now have the option of letting them make a one-time change to their plan. This comes at a time when employees may need relief from premium payments, extra coverage, or even more time to use their FSAs. You are not required to let employees make any changes, but if you decide to, you can allow them as many options as you like, including:
Enrolling in the plan if they had previously declined coverage
Changing from a higher to a lower cost plan, or vice versa
Moving from family to individual coverage, or vice versa
Dropping coverage, but only if they have another plan in place
Again, you don’t have to allow all or any of these changes. You also have to be sure that you make the options fair and equal to everyone. The IRS even suggests that employers only offer options that would improve healthcare coverage, such as moving from an individual to a family plan or from a plan that covers very little to a more comprehensive plan, to make clear that these changes are meant to benefit your employees, not simply lower your premium contributions.
In addition to changes to their healthcare coverage, employees now also have more flexibility when it comes to their FSAs. Your employees might be finding it harder to make the most of their FSA dollars these days because they haven’t been going to the eye doctor or dentist, for example. If they use these accounts for dependent care, they may have been unable to send their children to summer camp this year. For this reason, the IRS has extended the grace period for using 2019 funds through the end of 2020. Employees will also be able to roll over more of their funds through 2021.
What Employers Need to Consider
Your employees might welcome the chance to change their insurance policies right now, but you also have to think about how it will affect your business. Consider:
How it will financially impact your business if employees drop their plans, especially if it is the healthier employees who opt out and the employees who need more care who stay in
Your plan’s requirements. If your plan is fully-insured, there may be a minimum number of participants, so having employees opt out or change plans might mean having to rethink your whole healthcare policy.
The admin! It will take a lot of time and resources to review and process all of the changes.
It’s a tough decision to make. These are crazy times, and both you and your employees have a lot on your plates. As a small business owner who may already be struggling to provide healthcare, but who also wants the best for your employees, you may want to allow changes, but limit them. Consider following the example set out by the IRS and offer your employees the ability to enroll in or upgrade their plans. You can also decide to do an emergency stock-take: throw together a mid-year employee health survey and see what is on your employees’ minds. You have until December 31, 2021 to adopt your plan (which can be retroactively implemented), so don’t stress too much!
If you find yourself completely confused, then remember, EZ’s knowledgeable agents can answer any questions you have. And if you find YOU need a change in policy for your company, then come to us for instant, accurate, free quotes. We’re ready, willing, and able to shoulder some of the burden of small business healthcare, so get started with us today. Simply enter your zip code in the bar above. Or to speak with an agent directly, call 888-350-1890. No hassle, no obligation!
